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An interregional comparison of manufacturing and nonmanufacturing output.

A major question about long-term trends in the U.S. economy is whether manufacturing is important to future economic growth-in particular, as a stimulus to growth in other sectors. Rapid industrialization throughout much of Southeast Asia and the Far East, the resurgence of Latin American economies, and a potential North American free trade agreement represent a few of the challenges awaiting American manufacturers who want to remain competitive in the global economy.

In a recent study, we attempted to assess the impact of manufacturing on total nonmanufacturing output in Texas and fourteen other states with the highest gross state manufacturing product in 1986.* In trying to determine if growth in the manufacturing sector is correlated to growth in the other sectors of the economy, we focused on two regions of the United States: the Sunbelt and the Snowbelt.

For the period 1963-1986, several observations can be made about the two regions. First, the growth rate of real manufacturing product for each region followed a similar pattern over the business cycle. However, the degree of cyclical instability of manufactures was much greater in the Snowbelt than in the Sunbelt, as shown in the figure. Similar observations can be made in comparing growth rates of nonmanufacturing product for the two regions.

Second, the annual percentage share of real U.S. manufactures produced in the five Sunbelt states changed significantly, increasing from 18.2 percent in 1963 to 26 percent in 1986. An even more dramatic change took place in the ten Snowbelt states, with this measure falling from 57.7 percent in 1963 to 44.8 percent in 1986. Although we do not attempt to explain this change-mainly why U.S. manufacturers tended to move toward the South and Southwest (or abroad)-this phenomenon has been attributed to several factors, including business climate, decline in labor productivity, and oil price shocks.

Finally, the level of economic performance was more impressive in the five Sunbelt states than in the ten Snowbelt states. Between 1963 and 1986, the annual exponential growth rate of real manufacturing product was 4.6 percent in the Sunbelt states and 2 percent in the Snowbelt states. During the same period, the annual exponential growth rates of real nonmanufacturing product in the Sunbelt states and Snowbelt states were 3.7 percent and 2.3 percent, respectively.

While these two regions provide an interesting contrast of growth and decline in the manufacturing base, our empirical results show significant positive correlation between growth rates in the manufacturing and nonmanufacturing sectors for both regions. This relationship is slightly stronger in the Sunbelt region. The more modest relationship in the Snowbelt states may be the result of greater emphasis on regional economic diversification, whereby growth in nonmanufacturing sectors is less sensitive to changes in the demand for manufactures. For the Sunbelt states, a less mature and more rapidly expanding manufacturing sector may necessitate greater auxillary support from nonmanufacturing sectors of the economy. To the extent that intraregional firms provide the support, this would explain the higher correlation between rates of growth of manufacturing and nonmanufacturing product in Texas and other Sunbelt states.

However, regional trends in the composition of manufacturing output suggest that the impact of manufacturing growth on nonmanufacturing growth may vary less across regions in the future. Traditionally, durable goods production demands greater ancillary services, such that the higher the percentage of durables in total manufactures, the stronger the expected correlation between growth rates in manufacturing and nonmanufacturing product. The fact that the Sunbelt and Snowbelt have become more homogeneous in the composition of regional manufacturing product supports our finding of relatively small variation in the role of manufacturing across regions. In Texas, the increase in durable goods output as an annual percentage share of total state manufacturing product from 1963 to 1986 suggests that this state is showing greater alignment with regional and national trends. Mina Mohammadioun, Ph.D. Senior Economist & David Cowen Former Research Associate Bureau of Business Research

Mina Mohammadioun and David Cowen, A Regional Comparison of the Impact of Manufacturing on Economic Growth: The Case of the United States," Working Paper 1991-2, Bureau of Business Research, 1991.
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Title Annotation:Texas
Author:Mohammadioun, Mina
Publication:Texas Business Review
Date:Dec 1, 1991
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